TMI Blog1997 (1) TMI 141X X X X Extracts X X X X X X X X Extracts X X X X ..... as reached between the assessee and Shri Gopal Agarwal for carrying on the business of potatoes wherein Shri Gopal Agarwal would act as the agent of the assessee in the business for which Shri Gopal Agarwal was paid a sales commission of Rs. 1,15,510.68 and a storage charge of Rs. 21,29,710. Shri Gopal Agarwal was authorised to buy potatoes, store and sell them on behalf of the assessee. Shri Gopal Agarwal was to maintain proper records both for the purchase and sales of potatoes, the names of the seller, buyer, quantity and price. All the payments and receipts by Shri Gopal Agarwal should be made only by cheques/demand drafts. The contracts for purchase of potatoes were entered into on 17th Oct., 1984, and the list of the persons, the quantity and the consideration for the purchase as well as sales are available at pp. 6A and 6B of the assessment order itself. 4. The total amount spent for the purchase of potatoes during the accounting period was Rs. 1.51 crores. There was a sudden crash in the prices of potatoes in mid-November, 1984, and the sluggish condition continued till February, 1985. The assessee, therefore, had to sell the potatoes at a loss, whereby the assessee incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alleged sellers of potatoes and cash deposits in the bank accounts of the said Sukhani and his proprietary concern. (xiii) A part of the money required for purchasing potatoes was obtained by the appellant from Trades Services a concern closely associated with the Express Group. In its turn, Trades Services had borrowed money from the said Sukhani and his proprietary concern. (xiv) Such circular cash flow was also noticed in relation to the sale of potatoes allegedly effected by the appellant. There was a definite link between the repayment of the loan by ENP to its creditors (Trades Services and NPBS Ltd.) and the receipt of the sale consideration for potatoes from the buyers and thus the transactions are circular in nature. In view of the above, the AO held that the loss was not genuine and disallowed the same. 5. Before the CIT(A), the assessee submitted that: (i) Payments to Shri Gopal Agarwal were by account payee cheques. (ii) Shri Gopal Agarwal had admitted the receipt of the money. (iii) The source for the payments was fully explained. (iv) The appellant never dealt with any of the sellers directly but was operating only through Shri Gopal Agarwal. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation has not been done in his presence. It is relevant to note answers to question Nos. 25 and 26 put to Gopal Agarwal at p. 1839 at paper-book No. VII. (iii) The money part of the transactions relating to both the purchase and the sale of potatoes were effected only through banking channels. (iv) Gopal Agarwal had nowhere denied the said facts. Yet, the AO wrongly disbelieved the major role played by Gopal Agarwal. In this regard he had placed reliance on Gopal Agarwal s answers to question Nos. 87 and 88. (v) Thus, the assessee had clearly proved the source . It was not for the assessee to prove the source of source . (vi) The so-called discrepancies relied upon by the lower authorities only go to show that Gopal Agarwal, had cheated appellant by inflating the purchase price and by deflating the sale price. Since admittedly Gopal Agarwal had been in the cold storage business for over two decades at the relevant point of time, he could well have passed of his own potatoes as that of others. 7. To elaborate, since at a given point of time, the stock of potatoes belonging to many persons are kept stored in the cold storage, and since the owners of potatoes do not take d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the learned counsel for the assessee that the preliminary decree in an aggregate sum of Rs. 80 lakhs came to be given on the basis of admission of Gopal Agarwal. What is more till date Gopal Agarwal had not challenged the decree. The learned counsel for the assessee further submits that the two cold storages filed settlement applications before the Settlement Commission and the Settlement Commission was pleased to admit the applications under s. 245D(1) of the IT Act by its order dt. 24th June, 1988, in the case of Cold Storages (P) Ltd., and order dt. 14th July, 1988, in the case of Nirmal Navin (P) Ltd., which are available at pp. 848 and 850 of paper-book No. IV. In the said applications, the Cold Storages have in terms admitted that they had cheated the assessee. These vital facts have been ignored by the CIT(A). The learned counsel also invited our attention to the fact that the Department had launched prosecution proceedings against the assessee, its directors and Gopal Agarwal. Gopal Agarwal filed an application before the trial court, i.e., magistrate, explaining how he had cheated the assessee and prayed for necessary orders for discharge of the accused, viz., Expr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the assessee that in coming to the conclusion that the loss incurred by the assessee in purchase and sale of potatoes was only bogus, the AO was influenced by his own consideration that the transactions with Trades Services were bogus. In this regard, he had made the following points: (i) The so-called borrowals made by the assessee from Trades Services are traceable to the loans allegedly taken by the said Trades Services from K.K. Sukhani who was a hawala dealer and his proprietary concern Jethmull Chogmull. (ii) The monetary transactions relating to the said parties are circular in nature. (iii) The circular transactions were facilitated by opening 4 bank accounts, all in the Burra Bazaar branch of the Catholic Syrian Bank. 13. In this connection the assessee s counsel submits that the assessee had borrowed money for potato dealings not only from Trades Services but also from the following parties: . Rs. I.E. Newspaper (Madurai) (P) Ltd. 46,50,000 Nariman Point B.S. T.P. Ltd. 31,61,000 Trades Services 72,89,000 It is pointed out that the lower authorities have not doubted the genuineness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he neighbourhood of Rs. 55 lakhs. Our attention was also drawn to a letter dt. 1st Feb., 1988, written by Trades Services which is placed at p. 1767 of paper-book VII, enclosing the relevant extracts from a book "The Marwaris" wherein it is stated that the family of K.K. Sukhani were financiers for a long time right from 1845. The letter dt. 2nd Feb., 1988, written by Trades Services shows that Sukhani is a man of substantial means. The assessee, though is not obliged to prove the source of source, in this case, the source of source had also been shown to be in possession of funds large enough to lend to Trades Services. It was further submitted that the fact that Sukhani was a hawala dealer in relation to s. 35CCA cannot entail the AO to reject the potato loss claimed by the assessee. This apart, the assessee is also supported by legal position. Simply because a particular person admitted himself to be a hawala dealer, the AO cannot brand everyone whose names appear in the books of the hawala dealer, have actually indulged in hawala transactions. In other words, a general confession by the hawala dealer cannot be used as a brush to tar all the clients. In support of this con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of K.K. Sukhani Jethmull Chogmull. The mere fact that the cash withdrawals by the sellers of potatoes and deposits in the bank accounts of K.K. Sukhani and Jethmull Chogmull have taken place on the same day can only be said to be a matter of coincidence. Such coincidence is not enough to take a decision against the appellant. It is necessary to establish with the help of acceptable proof that the very same money withdrawn by the sellers came to deposited in the accounts of K.K. Sukhani and Jethmull Chogmull. The lower authorities have not brought on record any evidence to come to the conclusion. This is the position with regard to other deposits also. The assessee further submits that the lower authorities have fared no better in challenging the genuineness of the sales of potatoes effected by the appellant. As pointed out earlier, potatoes were sold only through the appellant s agent Gopal Agarwal. As already pointed out, again Gopal Agarwal cheated the appellant by selling potatoes at low prices to persons known to him or to his nominees. Even in relation to the so-called circular monetary transactions relating to sales, the vital link between the sales proceeds of potatoes on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee to make purchases came back to the assessee as expeditiously as possible. Similarly, the lower authorities have not proved that it was the assessee s funds that came back to it in the guise of not sale proceeds. The main source of income of the assessee is income from three properties at Madras, Bombay and Delhi. Thus, the assessee is getting fixed income. The Department has alleged that the assessee had generated bogus loss to reduce property income. This allegation is totally unfounded. Normally the practice of buying losses is resorted to only in the fag end of the accounting year or when there is a sudden spurt in the profits or when there is a windfall. This is not the case here. The contracts for purchases were entered into as early as in October, 1984, and the payment for the purchases started in November, 1984. The payment have all been made by account payee cheques. Then, the transactions are contemporaneous. Thus, the reliance placed by the CIT(A) on the decision of the Supreme Court in the case of Mc Dowell Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 is totally unwarranted. 21. Shri Subramanian, the learned senior standing counsel for the Department, on the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee had been audited and an audit report had been filed. It was also submitted that the arguments of the Department that the assessee s own money is circulated and that the transactions are circular in nature have already been met and that the money had been lost irretrievably by the assessee and it has not come back to it. It is true that it is the burden of the assessee to prove the loss. This has been discharged by the assessee as contended by the assessee s counsel. As regards the cold storage in operation the assessee s counsel submitted that he has already submitted that the cold storages in fact worked during November to February. The learned senior standing counsel for the Department, has however, failed to produce the relevant legislation which prohibits the working of the cold storages during November to February. 23. At the end of the hearing, the learned senior standing counsel for the Department produced two orders of the Settlement Commission passed under s. 245D(4) of the IT Act, one in the case of Naveen Cold Storage and the other in the case of Nirmal Nervin (P) Ltd. The learned counsel for the assessee, however, objected the admission of these evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by taking loans fraudulently from the financial institutions. It was further submitted that, Gopal Agarwal got away by playing fraud even on the Settlement Commission. Hence, it was submitted that the order of the Settlement Commission does not have any relevance nor does it advance the case of the Department. Therefore, the additional evidence filed by the Department is liable to be rejected. 25. We have gone through all the relevant facts and arguments of the rival parties in regard to the loss suffered by the assessee on potatoes business. It is an accepted fact that for doing potato business the assessee engaged Shri Gopal Agarwal for sale and purchase of the potatoes. Gopal Agarwal was interrogated on oath by the Department and Shri Gopal Agarwal had accepted this fact. Shri Gopal Agarwal has received commission as well as storage charges which is not also disputed by the Department. The fact that Gopal Agarwal approached the Settlement Commission and filed a petition is also established and the withdrawal of petition on doubtful and debatable submissions is also a fact on record. The assessee sued Shri Gopal Agarwal in the Court of law and obtained a decree for Rs. 80 la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uine, the conclusions drawn by the AO on this account are baseless. 27. After examining the full facts, we are of the opinion that the objections raised by the learned senior standing counsel for the Department have been clearly met by the learned counsel for the assessee. We are, therefore, of the opinion that the disallowance of the loss suffered by the assessee on account of business transactions on potatoes is not proper. This loss is held as suffered in the normal course of business activities and, therefore, to be allowed. Loss in shares and securities 28. The next ground of appeal is regarding non-allowance of loss suffered by the assessee in shares and securities. The details of this ground of appeal are discussed in pp. 32 to 38 of the assessment order. The assessee s statement of facts before the CIT(A) on this ground of appeal are at pp. 23 to 26 of the order of the CIT(A). The CIT(A) decided this ground of appeal in his order vide pp. 55 to 61. In this connection, the learned counsel for the assessee submits that the transactions relating to both purchase and sale of shares were one at arm s length, that is to say, that the transactions were entered into not with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or for arranging delivery of shares by purchasing them in auction. Our attention was also drawn to the answer given by Sushil Kumar Kayan to question Nos. 15, 16 and 17 placed at p. 894 of the paper-book No. IV. 30. It was also submitted that even if the shares are delivered after the book closure date, the brokers ensure that the benefits which accrue to the registered shareholder always reach the person who had entered into a contract for purchase of shares before the book closure date. The lower authorities have doubted the genuineness of the transactions because, according to them, the shares purchased by the assessee were sold immediately thereafter. Nothing turns on this aspect of the matter too. Clearly, the assessee is the best judge of the timing of purchase and sale of shares. In the instant case, the assessee sold the shares immediately with a view to minimise loss. Much has been made by the lower authorities of the fact that the person from whom the shares were purchased by the assessee, and the person to whom the shares came to be sold ultimately by the assessee was one and the same. The assessee submits that this view of the lower authorities is based on an incorrec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inancial constraints the delivery of the scrips was not taken. The CIT(A) himself had observed while dealing with potato loss that the assessee had borrowed huge money from others. Further, a sum of Rs. 1.51 crores had already been invested in potatoes transaction naturally there would be a fund constraint. Though this plea was raised before the AO, never did he disprove the same. That being so, the observation by the CIT(A) is unfounded. In any event, the observation had been recorded without calling upon the assessee to prove the statement. 34. The learned senior standing counsel again relied on the information based by the lower authorities and adjustably repeated and concluded the same arguments from the orders. In short, the arguments of the learned senior standing counsel for the Department can be summarised as follows: (a) The appellant deals with the same broker even though it had not made any profits even in the earlier years. (b) Payment to the brokers is made immediately whereas the appellant waits for two or three days apparently to facilitate its own money coming back. (c) Delivery has not been taken within 15 days as per the stock exchange regulations gap, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussions, we are of the opinion that the assessee genuinely suffered the loss in the trading activities of purchase and sale of shares which cannot be disallowed nor these transactions can be held as speculative in nature. The conclusions drawn by the CIT(A) on this account are considered as unreasonable and unjustified. Hence, this ground of appeal is decided in favour of the assessee. Loss on scrap dealings: 38. The next ground of appeal is in regard to the loss suffered by the assessee on scrap dealings, amounting to Rs. 17,97,081. The details of this ground of appeal is given in detail in p. 38 to 44 of the assessment order. The CIT(A) has discussed this ground of appeal in paras 62 to 69 of his order while deciding this issue. 39. The facts of this ground of appeal are that during the year under appeal, the assessee purchased and sold iron scrap. It purchased 3,496.143 MT at a cost of Rs. 102.48 lakhs from Bihar Merchandise Corporation and it sold the same to the following parties: . M.T. Rs. (Lakhs) A.K. Corporation 947.660 24.08 Pioneer Industries 682.960 17.07 P.K. Traders 728.140 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... till the sales-tax proceedings are over or bring it to Madras for production before the AO. The reason that the AO had been impounding whatever books produced could have very well prompted the assessee in favour of the books remaining with the consultant at Calcutta for production before the STO rather than risking its production before the AO. In any case, all details necessary for completion of assessment have been placed with the AO. It was further submitted that though the books of accounts, the non-production of which was according to the Department, fatal to the claim is lying with the Department for the past almost 8 years, during which the proceedings before the Settlement Commission was in progress. Nothing has been done with the books of accounts. It was contended that this would only show that the Department was finding an excuse to disallow the loss. 41. It was contended that the second reason given by the CIT(A) is that agreements were not produced. He should have seen that as early as on 29th Feb., 1988, the assessee had filed the agreements containing inter alia the quantity contracted for, the rates and the other terms. This had been explained in para VI. 3 at p. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amined by the AO and all of them have admitted that they have purchased scrap from the assessee. There was nothing unusual in the assessee paying the purchase price to the seller and receiving the sale consideration from the buyers on the same day, as both the transactions had taken place on the same day. 44. In this connection, the assessee s counsel pointed out certain observations made by the AO in the assessment order which are as follows: (1) The transaction has only resulted in a loss. (2) The bank account of Union Bank of India, Chowringhee Road Branch is not shown in the general ledgers. (3) The bank accounts does not show the receipt of the sale proceeds through the bank. (4) Delivery notes have been signed by one Shri C. Seshan, who used to sit at Madras. (5) All the buyers are related to Manoj Kumar Santhalia, one of the directors of the assessee-company. These observations of the AO have been challenged in the statement of facts filed before the CIT(A). Paras. 6, 7, 11, 12 and 13, respectively may be referred. However, the CIT(A) ignored all these submissions in recording a finding that the AO is justified in ignoring the loss. The CIT(A) has remarked that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Settlement Commission. Since none of such defects or discrepancies were observed or reported, it is proved that whatever stated by the assessee at earlier stages are supported by the documents seized by the Department on earlier occasions as reasonable and genuine. 47. It is also observed that since all the traders have confirmed the dealings with the assessee. The Department has not considered it reasonable even to intimate the transactions to the respective AOs. Since the matter, in question, is quite old and almost 12 years have already gone, no useful purpose would be served if the matter, in question, can be referred back. Since the material available on record and all the supporting documents clearly establish the fact of scrap dealings and all transactions are through account payee cheques, it can be genuinely believed that the assessee has suffered loss which should be allowed as part of normal business activities. We are, therefore, of the opinion that the CIT(A) is not justified in not allowing the loss suffered by the assessee on this account. Disallowance of interest. 48. The next ground of appeal is in regard to disallowance of the claim of the assessee towards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -allowance of investments amounting to Rs. 20,000 which is discussed by the AO at para 50 of the assessment order. The CIT(A) has decided this issue in paras 79 to 81 of his order. 54. The facts of this ground of appeal are that the assessee invested Rs. 10,000 each in the equity shares of two companies, viz., Express Traders (P) Ltd., and Colaba Exports (P) Ltd. Express Traders (P) Ltd., was formed with a view to run a preview theatre at Express Estates. Subsequently, due to various practical difficulties, this idea was shelved. Similarly, Colaba Exports (P) Ltd., was formed with an intention of carrying on business in preservation of sea-foods and meat. Since Bombay Port Trust refused permission, the business did not take off. There was no prospect of reviving the idea at a later point of time either. Thus, the investment in both the companies proved futile. The companies also applied to the Registrar of Companies under s. 560 of the Companies Act on 11th March, 1985, to declare them as defunct companies. Hence, the assessee wrote off these investments. 55. It was submitted before us by the learned counsel for the assessee that the AO disallowed the loss on this account witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 1 and V. 2, the CIT(A) has not adjudicated these grounds of appeal and the order passed by the CIT(A) is totally silent on these issues. These grounds are, therefore, restored to the file of the CIT(A) for his consideration and passing a suitable order. These grounds of appeal are, therefore, treated as allowed for statistical purpose. 62. The last ground of appeal taken by the assessee is in regard to the claim of status of the company where the public are substantially interested. The CIT(A) has restored this ground of appeal to the file of the AO, as in his own opinion, the decision of the AO in regard to this ground of appeal is based on the basis of the decision in the case of ACE Investments Ltd., a company in which public are not substantially interested and, therefore, the assessee was also treated as a company where the public are not substantially interested. Since this aspect was not examined by the AO, the CIT(A) restored this ground of appeal to the file of the AO for a detailed examination and passing necessary speaking order. 63. Under the circumstances, we feel that this ground of appeal is premature to be taken up at this stage because the point of status is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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